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An engineer at the XYZ Company has identified a piece of equipment that will generate after...

An engineer at the XYZ Company has identified a piece of equipment that will generate after tax labor savings of $644,500 at the end of each year for five years. What is the maximum amount the company should be willing to pay for this piece of equipment if the cost of capital (discount rate) for a project with this risk profile if 11.5%?

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Answer #1

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=644,500[1-(1.115)^-5]/0.115

=644,500*3.64987785

which is equal to

=$2352346.27(Approx)

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